Increased regulation has been widely cited as a catalyst for the recent wave of bank acquisition deals, but lately regulators have been throwing some wrenches into the works.

On Friday, Naugatuck Valley Financial Corp. in Connecticut became the second banking company in a week to call off a bank deal after failing to obtain regulatory approval. Also this month, a third acquirer delayed its deal, for a third time, as regulators considered its merits.

The rise in deal delays and cancellations shows that regulators are casting a more critical eye on proposed combinations because of concerns about the buyer or seller — potentially excluding some players from the consolidation game.

"I think, all other things being equal, as you see more and more banks having problems obtaining regulatory approval, it's going to make you think twice," John Roman, Naugatuck Valley's chief executive, said on Monday. "It's an expensive path to go down, so I think you've got to look closely … at the probability of success and the probability of obtaining the approvals that you need."

Roman should know. The $581.1 million-asset Naugatuck had to pay a $350,000 termination fee to Southern Connecticut Bancorp Inc. in New Haven, Conn., which it had agreed to buy in February for $19.5 million.

On Nov. 8, Northwest Bancshares Inc. in Warren, Pa., said it was canceling a deal to buy NexTier Inc. in Butler, Pa., for $20.3 million after regulators indicated they would reject the transaction over concerns about Northwest's compliance with consumer protection regulations. And this month Tower Bancorp Inc. in Harrisburg, Pa., extended the deadline for completing its purchase of First Chester County Corp. in West Chester, Pa., to Dec. 31 from Nov. 20, after the seller made a formal pact with regulators.

"Overall, they are paying greater scrutiny," Jason O'Donnell, an analyst at Boenning & Scattergood Inc., said of the regulatory agencies. "I think they understand that there's going to be a wave of mergers going forward, and I think the regulators want to make sure that they're not approving deals that don't make sense."

The Office of Thrift Supervision came down hard on the $8.1 billion-asset Northwest Bancshares, a healthy, profitable company that struck a deal in May to buy the $558 million-asset NexTier. The companies and analysts were caught off guard when Northwest said regulators asked it to terminate the deal and planned to issue an enforcement order against the would-be buyer.

"I was surprised that it went that far," William Wagner, Northwest's chief executive, said last week.

He said Northwest has strong capital — it raised $668 million after its conversion last year — and the company's credit quality is stable. Given the regulatory order, Northwest must shelve its acquisition plans. In a recent compliance exam, regulators determined that Northwest did not have a high enough level of oversight in interpreting and applying regulations. Wagner said the same compliance management system had passed muster before.

Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said of Northwest, "It's surprising that a bank like that, wh[ich] has the balance sheet to help absorb some of the weaker banks in the market, would come under this level of scrutiny."

Though Naugatuck Valley was comfortable with the $156.4 million-asset Southern Connecticut's credit quality, Roman said, regulators had concerns about potential problems in its loan portfolio. The deal also depended on Naugatuck Valley's raising capital through a second-step conversion. Given the weak second-step market, he said, the OTS was skeptical of how much capital the company could raise in a conversion and what the post-merger company's subsequent pro forma capital ratios would be.

Roman said he has a good relationship with regulators and respects their opinion. "We don't agree with them in this case, but we also have an understanding of their position, and what they're trying to accomplish on their side, too," he said. "But they're not making these deals easy, that's for sure."

Kip Weissman, a partner in the Luse Gorman law firm, said that, regulatory approvals aside, acquisitions are tough right now. Adding a capital-raising contingency — as with Naugatuck Valley's proposed conversion — only makes things tougher because of pricing, he said. Acquisition targets are fetching a premium to book value, but stock offerings are selling at a discount.

"Those kinds of deals can get very tricky. The stock offering has to be done at a higher price, and a lot of times that won't fly in today's market," Weissman said. "There is a big disconnect between the capital-raising market and the acquisition market."

Such deals were common in the middle of the last decade because pricing was better and having an acquisition lined up was a good way for converted mutuals to put capital to work quickly. Despite the difficulties, more deals are likely to be structured this way, Weissman said.

"It might be a long, hard road, but I think there will be more of this type of deal as things slowly get better," he said. "You just have to exercise care and caution."